Indian Steel Industry Analysis

By

VIVEK BHUTANI

Indian Steel Industry
Overview:
The establishment of Tata Iron and Steel Company (TISCO) in 1907 was the starting point of modern Indian steel industry. Afterwards a few more steel companies were established namely Mysore Iron and Steel Company, (later renamed Vivesvaraya Iron & Steel Ltd) in 1923; Steel Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron & Steel Ltd) in 1923; and Steel Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron and Steel Co) in 1939. All these companies were in the private sector.

Key Events
1907: Tata Iron and Steel Company set up. 1913: Production of steel begins in India. 1918: The Indian Iron & Steel Co. set up by Burn & Co. to compete with Tata Iron and Steel Co. 1923: Mysore Iron and Steel Company set up 1939: Steel Corporation of Bengal set up 1948: A new Industrial Policy Statement states that new ventures in the iron and steel industry are to be undertaken only by the central government. 1954: Hindustan Steel is created to oversee the Rourkela plant. 1959: Hindustan Steel is responsible for two more plants in Bhilai and Durgapur. 1964: Bokaro Steel Ltd. is created. 1973: The Steel Authority of India Ltd. (SAIL) is created as a holding company to oversee most of India’s iron and steel production. 1989: SAIL acquired Vivesvata Iron and Steel Ltd. 1993: India sets plans in motion to partially privatize SAIL.

At the time of independence, India had a small Iron and Steel industry with production of about a Million tonnes (mt). In due course, the government was mainly focusing on developing basic steel industry, where crude steel constituted a major part of the total steel production. Many public sector units were established and thus public sector had a dominant share in the steel production till early 1990s. Mostly private players were in downstream production, which was mainly producing finished steel using crude steel products. Capacity ceiling measures were introduced. Basically, the steel industry was developing under a controlled regime, which established more public sector steel companies in various segments. Till early 1990s, when economic liberalization reforms were introduced, the steel industry continued to be under the control of Indian Government, regulation were constituted such as large plant capacities were reserved only for public sector under capacity control measures; price regulation; for additional capacity creation producers had to take license from the government; foreign investment was restricted; and there were restrictions on imports as well as exports.

But after liberalization many reforms and regulation were changed which brought the new era for development in steel industry. Some of the major developments were : 1. Large plant capacities that were reserved for public sector were removed; 2. Export restrictions were eliminated; 3. Import tariffs were reduced from 100 percent to 5 percent; 4. Decontrol of domestic steel prices; 5. Foreign investment was encouraged, and the steel industry was part of the high priority industries for foreign investments and implying automatic approval for foreign equity participation up to 100 percent; and 6. System of freight ceiling was introduced in place of freight equalization scheme.

Due to this, the domestic steel industry has since then, become market oriented and integrated with the global steel industry. This has helped private players to expand their operations and bring in new cost effective technologies to improve competitiveness not only in the domestic but also in the global market.

During the last decade more than 12 mt of capacity has been added in the steel industry, this is mostly in the private sector. Recently, the steel industry is receiving significant foreign investments such as POSCO—South Korean steel producer—and Arcelor-Mittal Group— UK/Europe based steel producer—announcing plans for establishing about 12 mt production units each in India.

Major production of steel is done by six companies.

ISPAT 13%

OTHE RS 4%

JSW 13%

SAIL 37%

ESSAR TATA 15% STEEL 18%

Production:
India is currently the fifth largest steel-producing nation in the world with installed capacity of 59.02 million tons. China is the largest steel producer of the world. The steel industry in India has an oligopolistic structure. The total capital investment is around Rs. 1 trillion and provides employment to more than 2 million people.

Crude steel production was at 54.52 million tonnes, a growth of 1.23% over last year with capacity utilisation at 89% during the year. It grew at more than 9% annually from 38.72 million tonnes (MT) in 2003-04.

Production for sale of total finished steel was at 56.39 million tonnes, a growth of 0.6% as compared to last year. As against 40.71 MT in 2003-04, an average annual growth of 7.3% was registered. Total finished steel exports decreased by 26 % as it reached an estimated 3.75 million tones while imports were at an estimated 5.77 million tonnes, a decline of 18 %. At 51.85 million tonnes, domestic consumption of total finished steel declined marginally by 0.53%.

The Government has announced initiatives to promote R&D in iron and steel sector to help develop better products, improve the manufacturing process, and attain self sufficiency which will bring Indian production steel in better position.

Imports and Exports

The exports and imports decreased in the 2008-09 due to increase in domestic consumption mainly by infrastrucure sector with growth of 5.3% and automobile industry with growth of

12.7%. .

Consumption
India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of the total steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels and retail stores is growing immensely. India's steel consumption rose by 6.8 per cent during April-November 2009 over the same period a year ago on account of improved demand from sectors like automobile and consumer durables.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. India has immense scope for increasing consumption of steel. Current per capita consumption is around 40 kg, compared with 100 kg in Brazil, 250 kg in China and a global average of 198 kg. Steel demand is expected to rise 5-6 percent annually until 2019-20 Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is targetting to increase it to 200 by March 2010. They expect at least 10-15 per cent of their total production to be sold by their retail outlets. Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000 outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two years

India is not among the top exporters and importer of steel because of its high consumption. As shown in above graphs.

Key Drivers of Steel Industry
Construction: The construction industry has been witnessing a growth rate of 12%-14% in recent times. Steel construction is now identified with speed and since India is in need of speedy project implementation, steel is the best alternative for fast track construction. With economy surging ahead and expected increase in income levels of population, it is believed that demand for steel from this sector will continue to grow at current rates if not improve Automobile: The domestic automobile industry has also grown at more than double-digit rates in the past five years. The Indian automobile sector is the second fastest growing market after China and has emerged as a prime demand driver for alloy steel. Automobile sector which is experiencing growth and competition is likely to be one of the major drivers for steel consumption in the coming years and most likely, its contribution in the overall demand pie is likely to improve from the current levels. Auto components Industry: During the last five years, auto components market has grown at 19% CAGR, led by both robust domestic demand as well as exports. India is fast emerging as hub for auto components. International companies such as General Motors, Ford, Daimler Chrysler, Toyota and Volkswagen are outsourcing auto parts from India as it has cost advantage with regard to forgings and castings. Also, the growing domestic automobile industry, which relies on steel industry for its parts manufacturing, will enhance the demand for steel in India. Infrastructure: Infrastructure sector comprises of roads, railways, airports and power. The 11th Five-year plan has lined up huge investments in all the above related sectors of infrastructure. The sector wise anticipated investment are $200bn in power, $80bn in railways, $48bn in roads, $13bn in ports and $9bn in airports. Because of surge in the above activities, the demand for long products of steel will be increasing in years ahead. Consumer Durables: The consumer durables sector has also been witnessing robust growth. It has grown at an average of 10% per annum and is expected to grow at double-digit rates for coming years. The share of white goods and utensils is predominant in India. The domestic appliances market which includes spin driers of washing machine, almirahs, thermo ware, water

filters, dishwashers, microwave ovens, catering equipments, cutlery, furniture etc have opened new opportunities for steel consumption, thus ensuring a steadily growing trend of steel off take. Oil & Gas Industry: Oil & gas sector is the major consumer of steel tubes and pipes. The pipe consumption in oil & gas sector is expected to grow at a rate of 25% CAGR as this sector is set to witness massive capital investment. Apart from laying cross-country pipelines, exploration and production activities are also experiencing strong growth in both international as well as domestic markets.

COMPETITION

Key Inputs

With trade barriers having been lowered over the years, imports play an Supply important role in the domestic markets. The demand is derived from sectors that include infrastructure, Demand consumer durables and automobiles. High capital costs, technology. Barriers to entry The government’s move on railway freight costs and grid power costs Bargaining power of would determine the final price of the metal. suppliers

High, presence of a large number of suppliers and access to global Bargaining power of markets. customers High, presence of a large number of players in the unorganized sector. Competition

SWOT Analysis
Strengths
1. Availability of iron ore and coal: India has abundance of iron ore, coal & other raw

materials required for iron & steel making. It has 4th largest iron ore reserves (13 bn tons) in the world.

2. Low labor wage rates: India has low unit labor cost, this gets reflected in low cost of

production
3. Abundance of quality manpower: It has 3rd largest pool of technical manpower, next to

United States & erstwhile USSR, capable of understanding and assimilating new technologies. 4. Mature production base

Weakness

1. Unscientific mining: India is deficient in raw materials required by the steel industry.

Iron ore deposits are finite and there are problems in mining sufficient amounts of it. India's hard coal deposits are of low quality
2. Low productivity: According to an estimate crude steel output at the biggest Indian

steelmaker is roughly 144 tonnes per worker per year, whereas in Western Europe the figure is around 600 tonnes.
3. Power shortages: Steel production in India is also hampered by power shortages.

4. Inadequate infrastructure: Insufficient freight capacity and transport infrastructure

impediments to hamper the growth of Indian steel industry
5. Low R&D investments: There are inadequate investments in infrastructure.

6. High cost of debt: Since huge capital investment is required therefore cost of these dbt is

very high. Opportunities
1. Unexplored rural market: The Indian rural market remains fairly unexposed to the

multi-faceted use of steel.
2. Growing domestic demand: There is enormous scope for increasing consumption of

steel in almost all sectors in India.

3. Export Market Penetration: It is estimated that world steel consumption will double in

next 25yrs. Quality improvement of Indian steel combined with low cost advantages will definitely help in substantial gain in export market.

4. Consolidation: As global companies have realized the threat of excess supply, they are

looking at M&A (mergers and acquisitions) option to retain market share and improve margins.

Threats
1. Technological change: Technological changes force the industry structure to change. In

India where capital itself is costly, technological obsolescence is a major threat.
2. Price sensitivity & Demand volatility: The demand for steel is derived demand and the

purchase quantity depends on end-use requirements. The traders are price sensitive and buy when there are discounts.

3. Dumping of steel by developed countries: High quality products for developed

countries available for imports at competitive prices. 4. Slow Industry Growth

ISSUES & CHALLENGES

Dependence on Global Market: The concern with respect to new steel capacities cropping up across the globe have become louder, as this development would lead to significant pressure on steel prices going forward. Further, the biggest disruption in the growth pattern is from a slowdown in Chinese steel consumption. Post Olympics, demand from China has reduced and therefore demand for Indian iron-ore. There is good amount of excess steel available for world consumption. As global companies have realized the threat of excess supply, they are looking at M&A (mergers and acquisitions) option to retain market share and improve margins. Cheap Imports: The domestic steel sector is facing threat from cheap imports, now that the import duties on steel in India being amongst the lowest in the world. Import pressure is consequently leading to pressure on margins of the domestic companies on account of lower steel realisations. Increased transportation charge: Railway has decided to reclassify iron-ore to a higher tariff class of 180(present is 170), which will increase the transportation charge by 5%. Lack of best professionals: The methods that are adopted for the creation of wealth in the Indian steel industry are also supposed to act as hindrances to the growth and development of the Indian steel industry. The Indian steel industry has also not been able to draw the best professionals in the steel industry and that has been a major drawback of the industry.

Lack of infrastructure: Even though India is capable of producing steel at a good rate and also increase the volume of production there is not enough land available to support such activities. One of the major reasons for such problems is the consistently increasing population of India. Raw materials: The earth is made of iron. There is no shortage of iron in the longer term. However, today over 70% of the total seaborne trade in iron ore is dominated by just three companies: CVRD, Rio Tinto and BHP Billiton. As a result, the steel industry has seen a dramatic increase in the price of raw materials, including iron ore. It is crucial and important for the sustainable development of the steel industry to break out of the stranglehold that these three companies have on raw material supply.

Policy and Regulations

The Government has also approved the National Steel Policy (NSP) in November 2005.

The long-term goal of the NSP is for India to have a modern and efficient steel industry of world standards. The focus of the policy would therefore be to achieve global competitiveness not only in terms of cost, quality and product-mix but also in terms of global benchmarks of efficiency and productivity.

The policy targets to increase steel production at a compounded annual growth rate of

7.3% to 110 mt by 2019-2020. It projects domestic consumption to grow at annual growth rate of 6.9% to 90 mt during this period. The policy envisages the share of exports to increase to 25% from present share of 11%.

The government would also encourage investments in creation of an additional modern

iron ore mining and beneficiation capacity of 200 mt. under this policy

Recent increase in infrastructure spending is also expected to have a positive impact on

the steel demand. Major investments planned in infrastructure sector are, national highway network, major ports, and airports. The Government also proposes to undertake measures to promote usage of steel in bridges, crash barriers, flyovers and building construction.

100% FDI is allowed under the automatic route for metallurgy and processing of all

metals.

Impact of Budget in Steel Industry
Proposal Introduction of competitive bidding Impact for would to lead to the development of the benefit the steel industry, for which coal is a key input Companies will not be able to pass on the complete rise in cost, marginally negative for 2% increase in excise duty steel manufacturing companies

allocation of coal block and regulator for the domestic coal sector, which in turn would domestic coal sector Cess of Rs. 50 per tonne on coal and

Increase in infrastructure spending

Positive for the sector as this will lead to higher

domestic consumption Decrease in surcharge on domestic companies Positive for all the companies, will lead to from 10% to 7.5% lower tax outgo

Impact of Budget on Stock prices of 3 major steel manufacturers:

SAIL

TATA STEEL

JSW steel

The stock prices before the Budget were flowing with the flow of market but soon after the budget the prices of steel companies performed better than the market showing clear signs that budget was good for steel industry.

Measures Taken by Ministry of steel for growth of industry:
Mega Expansion Plans of SAIL, RINL & NMDC Ltd. The expansion plans would increase the capacity of SAIL from 14.6 million tonnes per annum (2006-07) hot metal production to 26.2 million tonnes by 2010-11. SAIL is also planning to expand the capacity further to 60 million tonnes per annum by 2020.

Special Purpose Vehicle (SPV) The Special Purpose Vehicle (SPV) called ‘International Coal Ventures Ltd (ICVL)’ has been incorporated on 20.5.2009 with SAIL, RINL, CIL, NTPC & NMDC as promoter partners. ICVL will function as a Navaratna Company and is presently examining various proposals and from the point of view of suitability of coal, costs and logistics etc. Mergers, Acquisitions and Joint Ventures Merger of Kudremukh Iron and Steel Company (KISCO) with Kudremukh Iron Ore Company Limited (KIOCL). Merger of Bharat Refractories Limited(BRL) with Steel Authority Of India Limited (SAIL) Proposal for acquisition of Neelachal Ispat Nigam Limited (NINL) by RINL Joint Venture Company comprising Steel Authority of India Limited (SAIL) & Manganese Iron Ore Limited (MOIL)

Rural Distribution Network of Steel A decision was taken to have at least one dealer in each district in order to make available steel items to common man. In order to ensure the availability of commonly used items of steel in the

rural areas across the country, SAIL and RINL are expanding their distribution networks at a fast pace. Preference for SC, ST and OBC are given while allotting District Level Dealerships. Further, common steel items have been made available in rural areas at the same price at which they are available in cities having stockyards. The cost of transportation from the stockyard to the dealer’s location is borne by the steel PSUs.

Encouraging Research & Development in Iron & Steel Sector The current level of investment in R&D in the Indian Steel Plants is less than 0.24% of their total turnover. In order to encourage R&D activities in Iron and Steel sector, Ministry of Steel is providing financial assistance.

Critical Analysis

Looking at the increased demand from construction, real estate and automobile sectors the steel industry will carry its growth momentum in coming years as well. Construction Industry Current and estimated growth of construction industry

Construction industry expected to witness effective investment over Rs. 10,000 bn during the 11th five year plan Construction is the second largest economic activity in the country next to agriculture. Construction industry has generated employment for 33 mn people in the country. Consumption of steel by construction industry has grown of 16.1% over past 5 years. Real Estate Almost five per cent of the country's GDP is contributed to by the housing sector. In the next five years, this contribution to the GDP is expected to rise to 6 per cent. Foreign direct investment (FDI) into India in the real estate sector for the fiscal year 2008-09 has been US$ 12.62 billion

Government initiatives in Real estate sector: 1. 100 per cent FDI allowed in realty projects through the automatic route. 2. Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at US$ 10 million and US$ 5 million, respectively. 3. The finance minister allocated US$ 207 million to grant a 1 per cent interest subsidy on home loans up to US$ 20,691,

Thus, Indian industry real estate is likely to grow to U.S. $ 90 billion in 2015. This industry is likely to grow in tandem in both residential property and commercial real estate to continue huge influx of FDI in this sector will go a six times to U.S. $ 30 billion over the next 10 years . Automobile Sector:

There is constant growth in automobile sector in past year but in 2010 the growth rate come down to 7.1% due to increase in excise duty and increase in price of petrol. But automobile sector is 2nd largest industry in India to attract FDI and being 100% FDI in automobile sector will lead to ever growing demand of steel by Auto industry.

Looking at the increased demand from construction, real estate and automobile sectors the steel industry will carry its growth momentum in coming years as well. Government is also lending its full support to the steel sector which is cleared from the recent Union Budget 2010 in which the government has decided to increase the outlay on urban development and housing to Rs 5,400 Crore (up 75%). An additional 25% of plan outlay for rural infrastructure has also been announced. This is being seen as a stimulus for domestic steel companies. All these supporting factors will help the finished steel consumption in India to grow more than 65 Million Tonnes in 2011-12.

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